G-Sec yield curve is a public good

I had mentioned about this interesting report from RBI that covers India’s Financial Markets.

I was going through it over this weekend and I found this chapter on Government Securities was quite good. Sometime back a friend of mine had posed a question why do we need a G-Sec market and how does a secondary market in G-Sec help financial markets help. This paper does answer the same.

The need to develop the government securities market emerges from the three roles it seeks to play, i.e., for the financial markets, for the Government and for the central bank .

  • From the perspective of an issuer, i.e., the Government, a deep and liquid government securities market facilitates its borrowings from the market at reasonable cost. A greater ability of the Government to raise resources from the market at market determined rates of interest allows it to refrain from monetisation of the deficit through central bank funding. It also obviates the need for a captive market for its borrowings.
  • For the central bank, a developed government securities market allows greater application of indirect or market-based instruments of monetary policy such as open market (including repo) operations. A greater recourse to the market by the Government for meeting its funding requirements expands the eligible set of collaterals, thereby enabling the central bank to conduct monetary policy through indirect instruments. The expanding quantum of eligible collaterals has imparted flexibility to central banks of many developing economies in their conduct of monetary policy, especially in sterilising the capital flows.
  • The government securities market serves as the backbone of fixed income markets through the creation of risk-free benchmarks of a sovereign borrower. Ipso facto, it acts as a channel of integration of various segments of the financial market. 

The last of the three reasons is perhaps the most important and least understood.

We use government bond yields to calculate equity premiums and price most of the other securities depending on the bond market. So, if this market is liquid and there is active trading it ensures price discovery and helps price risk of other financial instruments in a dynamic manner. The report rightly says that G-Sec yield serves as a public good for the financial markets.

8 Responses to “G-Sec yield curve is a public good”

  1. Capital Structure of Indian Companies « Mostly Economics Says:

    […] blog(atleast it surprised me). RBI in its currency and finance report ( I have written about it here as well) has given a pretty interesting picture of how Indian corporates’ sources of […]

  2. How integrated are India’s Financial Markets « Mostly Economics Says:

    […] of the best reports so far on India’s Financial Markets. I have summarised 2 chapters so far, G-Sec markets and Equity and Corporate Debt […]

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    The financial crisis has been linked to reckless and unsustainable lending practices compounded by government intervention and the growing trend of securitization of real estate mortgages in the United States.[4] The US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices.

  5. alok dharia Says:

    Where can i find historical yield curve data for gsec?

  6. mimi Says:

    I am a regular reader of your blog and find the same useful as it offers insights to various issues My particular interest is in macroeconomics specifically international macroeconomics/finance.Currently I am doing research and need daily, monthly and annual G-sec Yield curve Additionally I want to have data on three factors (level, slope and curvature) of G-Sec Yield curve I need these data from 2000 to 2010 I will greatly appreciate if you can tell me the sources from which I can get these data Thanking you in advance for your kind and prompt response

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